| The United States finally averted a debt default on October 17. If it happened, the U.S. credit rating would have likely been downgraded, with the financial market collapsing, dollar-denominated assets plunging, consumer credit crippled and bank credit exhausted.
China had bought U.S. government bonds worth $1.27 trillion at the end of July. If the United States defaulted on its debt, China would undoubtedly suffer. Zhu Guangyao, China's Vice Finance Minister, called for the U.S. Government to take credible steps to ensure the safety of Chinese investments and the interest payments of government bonds should the default become reality.
The U.S. debt problem is a lesson for China. First, China should diversify its holdings and disperse investment in financial products to avoid similar risk and danger. Of course, theoretically speaking, China can also threaten to sell off its U.S. bonds, which would cause U.S. Treasury bonds to plummet and incur more losses for China.
Hence, China needs to gradually rein in its holding of U.S. Treasury bonds by dispersing its investments, closing the trade surplus gap, restraining the rapid growth of foreign exchange reserves, hastening steps to open its capital account and reducing limitations on overseas investment by domestic residents.
Second, China's local government debt is more worrying compared with the U.S. debt crisis. In June, the National Audit Office announced that 36 local governments owed debt of 3.85 trillion yuan ($631.2 billion). Among them, 16 saw a debt ratio exceeding 100 percent, with the highest hitting 219 percent. In terms of urban construction investment bonds, the Yangtze River Delta region tops the list with an overall debt ratio of more than 200 percent.
Though the potential for a default by the U.S. Government is worrisome, the public has knowledge of its origins and possible solutions. In contrast, China's local government debt is a mess and the specifics are few. If U.S. debt can be likened to a man pushed to the edge of a cliff and is aware of the distance to the bottom, China's local government debt is a man with his back to the cliff.
Third, government budgets should be transparent and open to supervision. Superficially, bipartisanship is the culprit that has led to the shutting down of the U.S. Government. Yet, it was all due to a budget from one wing of the U.S. Congress that must receive approval from another. This ensures that the government can't issue bonds of its own will, nor will it dare waste public money.
Why is it that China's local governments extravagantly spend taxpayers' money on vanity projects? Local people's congresses fail to play a supervisory role in keeping government budgets in check. Only when they act much like the U.S. Congress does in supervising the White House could taxpayers' money be spent in an efficient way.
This is an edited excerpt of an article published in Economic Information Daily | 
